Selected Articles

Articles about legal and other aspects of Turkey.

Banking in Turkey

Whilst it cannot be denied that Turkey must bring about significant change before its’ banking system can be considered on par with those of Western nations, critics in drawing comparisons often neglect to analyse the current situation within an historical context.


Opinions as to the current state of affairs although not misleading or ill- informed, often represent mere snap shots of a broader picture.

To put matters into prospective, Rothschild first established himself as a money lender in the late eighteenth century, a number of private Dutch banks have been operating for near to a century and the Bank of England was first founded in 1694. In stark contrast the first private Turkish bank opened for business in 1944. The Turkish banking sector has in fact modernised and progressed at a considerable rate, this is particularly true if one takes into account that the many hurdles to be overcome were further accentuated by the nation’s economic and political problems; since the two areas are interwoven, improvements or set backs in one area naturally effect the other and visa versa. Despite such obstacles, the sector is today quietly confident that if IMF guidance is heeded by the Government then the necessary economic reform will be successfully enacted and such measures will consequently lay the foundations for a healthier and more secure banking sector in the next millenium.


In order to comprehend just how the Turkish banking sector evolved to its present day status, one would have to trace its’ roots back to the Ottoman period. (In fact the first foreign bank, the Ottorman Bank was established as early as 1856 as a joint venture between the French and the British, whilst the first national bank Ziraat Bankasi founded in 1863, both banks still operate today). However so as to provide a general insight, three periods are worthy of discussion:

1) 1945-1959
2) 1960-1980
3) 1980-to date

1) 1945-1959

The post war years brought new found wealth to Turkey and thus the private sector witnessed growth on account of high inflation and speculation in the markets during the war, such development being further fuelled by liberal economic policy, minimalist state control and increased industrialisation.

In increasing investment to the nation’s infrastructure and utilities, the Government relied heavily upon raising finance from abroad and domestic agricultural production. Harvest yields and agricultural productivity later fell yet the Government continued to modernise by drawing upon Central Bank reserves on an increasing scale.

This level of investment brought about an increase in the GDP, population, urbanisation and production, the resultant growth in income leading to the establishment of five major private banks. Increased competition within the market brought about the practice of branch banking and the establishment of the first development banks however much of the necessary founding capital for these projects was provided by the state in the form of long-term loans.

The increasing Government expenditure as outlined above was met by a continued over reliance on Central Bank reserves, this had the effect of destabilising the economy and inflation thus rocketed whilst the foreign trade deficit grew. These factors along with insufficient foreign currency reserves put increasing pressure upon manufacturers when importing production materials and inevitably the Turkish Lira was devalued as part of a stabilisation programme and the country fell into recession.

(Pre -1945: Please note that Turkiye Is Bankasi was the first national bank to be established in 1924 upon the founding of the Turkish Republic, further state banks were established in the 1930’s; (Sumerbank, Etibank, Demirbank and Halk Bankasi) and the sector further enlarged through the opening of the following private banks; Yapi Kredi Bankasi, Garanti Bankasi, Akbank and Pamukbank in the late 1940’s and early 1950’s)

2) 1960-1980

The Government took radical steps at the onset of the sixties and liberal policy was abandoned in favour of a mixed economic model. Protective policies were formulated aiming to lock out imports and increase domestic production. Irrespective of market conditions interest and exchange rates were set by the Government and whilst levels of investment in the country’s utilities and the manufacturing base were preserved, the costs of exporting products and importing raw materials was funded by negative real interest rates and an overvalued Turkish Lira.

Further progress in the banking sector during this period was hampered by state control over interest rates, commissions and credit limits, the sector’s role being restricted to financing investments as determined in accordance with Government development plans. Few new banking licenses were issued and as competition was limited, many small banks were either merged or liquidated. In parallel to the prevailing economic conditions, private banks continued to place emphasis upon branch banking in order to increase deposits collected in negative interest rates whilst a large number of commercial banks were restructured as holding banks. On a more positive front, five major development banks were established during this period so as to implement Government plans pertaining to for example the manufacturing, energy, mining and transport sectors.

Medium and long term financing continued to be met by Central Bank loans in addition to public sector borrowing. The Central Bank loans made in order to finance subsidies brought no returns and the level of money supply and inflation continued to climb. This chain of events coupled with the concentration of manufacturing for the domestic market pushed up the level of foreign debt whilst the balance of payments persisted to suffer.

3) 1980 to date

The economic recession necessitated reversion to liberal economic policy and a move towards a free market economy. The eighties are thus categorised by continuing legal, structural and institutional reform. In order to encourage the savings essential to economic growth, positive real interest rates were implemented, barriers to the banking sector lifted and exchange rates freed from Governmental control. Foreign banks were embraced whilst their Turkish counterparts made a break into the foreign market place through the purchase of foreign banks and the opening of foreign branch offices.

The passing of the 1985 Banks Act introduced international banking standards, supervision, independent external auditing in compliance with international accounting standards and realistic provisions in respect to non-performing loans.

Further key dates and developments in this period can be listed as follows:

1981 The introduction of the Capital Markets Law.
1986 The opening of the Istanbul Stock Exchange.
1987 Central Bank commenced open market operations.
1988 The establishment of the Foreign Exchange Market.
1992 The introduction of “Asset Backed Securities”.
1992 The instalment of the electronic funds transfer system.
1992 The establishment of the Turkish Inter-bank Clearing System.
1995 Fifty-eight Turkish Banks join SWIFT.
1995 The establishment of the Gold Market.

Increased competition brought about many new banking services that have long been available in Western Europe, such as consumer loans, credit cards, automatic teller machines, point of sale machines, leasing, factoring, forfeiting, swaps and options. Moreover in order to install confidence in the banking sector, the Central Bank introduced monetary policy so as to ensure the efficient flow of funds and reserves through the banking system.

Foreign currency borrowing and deposits, induced an increase in the ratio of foreign currency deposits over total deposits and this further fuelled high inflation, which continued to plague the 1980’s and 1990’s. Public sector borrowing requirements remained high pushing up interest rates, the combination of these two factors adversely effecting the banking sector as costs in Turkish Lira funding were increased, foreign borrowing thus expanded and accordingly the banks found themselves wide open on the foreign currency markets. In 1994 the industry’s luck ran out and substantial losses were incurred, problems being further exaggerated by Government policies designed to lower interest rates and increase taxation on financial instruments. Attempts were made to reinstall confidence in the sector through for example the introduction of state insurance on all savings deposits but not enough solid action was taken to correct the lack of external borrowing.

Once interest rates stabilised at a higher level the economy began to recover, high interest rates having the effect of slowing down currency substitution.


The legacy of past economic policy could not be overturned by endeavours made at short term measures and thus the republic’s high inflation, public sector borrowing and trade and balance of payments deficits were not corrected. Increased borrowing requirements eventually led the Government to request a new loan from the IMF, who in granting future funds set out a time table aimed at bringing about stability, primarily through the reduction of inflation. In 1998 it was agreed that a staff monitoring programme be implemented, this programme specifically targeted inflation and the balance of payments deficit, calling for inter alia: a) the narrowing and strengthening of public finances, b) stepped up privatisation so as to improve economic efficiency and lower the domestic borrowing requirement, c) the lowering of public sector wages and gradual phasing out of agricultural subsidies in order to meet targeted inflation. d) the daily fixing of the rate of exchange for the period of one year so as to increase the rate of depreciation to 20 percent in order to meet disinflation targets. One significant outcome of the agreement concerned the limitation over forward foreign currency transactions, many banks having struggled to close their positions only to be later hit by further regulations imposing increases in withholding and capital gains tax over financial instruments.

From the above potted history, it is hoped that a reader can thus appreciate that the moulding of the Turkish banking sector was heavily influenced by the ongoing complexities and set backs which occurred as a result of the economic climate. Objectively speaking the sector has performed at reasonable levels given the circumstances. Indeed many reputable Turkish banks have been able to sustain growth and stability despite the effects of economic and political hardship, therefore in questioning whether or commentators are overly pessimistic, one could be forgiven for thinking that perhaps good news just fails to make headlines.


The 1998 IMF staff monitoring programme was adopted at a time when the international financial environment had deteriorated, the latter bringing about negative effects upon domestic interest rates and external and general budget financing. Nonetheless during the IMF visit in October 1998, the executive directors commented that irrespective of the upheaval in the global capital markets and Russian economic crisis, Turkey had endured and achieved positive results through their efforts for stabilisation. Central to policy implementation was and remains the strengthening and tightening of fiscal, structural and monetary policy, (these goals being intertwined). Since the onset of the programme Turkey’s economic performance has been mixed, whilst disinflation gains have been made and careful monetary management has restricted the aftermath of the Russian economic crisis and nourished foreign investment, the implementation of tougher fiscal and incomes policy has lagged, pushing up interest rates and slowing economic growth.

Nevertheless, the majority coalition Government elected in April 1999 has provided Turkey with a new founded and much needed focus, albeit with the support of the IMF, The coalition would appear to be setting down realistic long term plans. Since their election the Government have realised the following reforms as part of the IMF program:

a) June/December 1999
The enactment of a New Banking Act establishing an independent banking regulating and auditing institution.

b) August 1999
Social Security reform increasing the age of retirement to 58 for women and 60 for men.

c) August 1999
Amendments so as to reduce the standard ratio for the “Foreign Currency Capital Base”.

d) August 1999
New legislation regulating the “Accounting for and Valuation of Bank Credits and Funds Covering Credits”.

e) August 1999
Constitutional reform, the recognition of international arbitration and privatisation.

f) Ongoing
Tax Law to be overhauled a) income tax; (except wage income),and corporate tax having already been increased by five per cent. b) increase of two per cent in the rate of withholding tax on interest income derived from bank deposits and repo transactions, c) the taxation of Government Bonds, Treasury Bills and Revenue Sharing Certificates to be taxed according to market value as opposed to purchase value and d) VAT increase by two per cent.

The coalition’s accomplishments were successful in securing a four billion USD stand-by agreement in late December 1999. The IMF’s executive directors in praising the strength and design of the economic measures and Turkey’s commitment to a predetermined exchange rate, commented that the program “should facilitate the rapid decline of interest rates needed to stabilise the debt ratios and lead Turkey out of the current recession”. The grant of the loan is expected to bring about greater confidence in Turkey from the financial markets, which should allow the Government to restructure its current debt by replacing costly domestic loans with cheaper foreign financing.


Erenköy Mah. Ethemefendi Cad. Gündoğdu Apt. 20/8 34738 Kadıköy, İstanbul/Turkey


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